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Why $40 Crude Oil Might Not Be Far Away

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US crude oil active futures below $45 mark

On June 15, 2017, US crude oil (USO) (DBO) (USL) active futures settled at $44.46 per barrel, the lowest settlement price in 2017. On the same day, US crude oil active futures were 18.3% below their 2017 highest closing price. A bear market starts when securities fall more than 20%. In the trailing week between June 8 and June 15, 2017, US crude oil July futures tumbled 2.6%.

On June 14, 2017, US crude oil July futures fell 3.7% after the EIA (US Energy Information Administration) reported US crude oil inventory data for the week ended June 9, 2017. The fall was triggered by an unexpected rise in gasoline inventories and a smaller-than-expected fall in crude oil inventories. Total motor gasoline inventories rose 2.1 MMbbls (million barrels) compared to analysts’ estimate of a fall of 0.46 MMbbls. Crude oil inventories fell 1.7 MMbbls, whereas analysts had projected a fall of 2.7 MMbbls.

Apart from the inventory disappointment, according to the EIA’s latest data, US domestic crude oil production rose by 12 thousand barrels per day in the week ended June 9, 2017, compared to the week before.

Rising US crude oil supplies could overshadow any possibility of a recovery in oil prices and drag oil prices below the $40 level.

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Broader market versus crude oil

The S&P 500 Index (SPY), which has some exposure to the energy sector, fell 0.1%, and the Dow Jones Industrial Average (DIA) rose 0.8% between June 8 and June 15, 2017. In part two of this series, we’ll discuss the correlation of these equity indexes with crude oil.

Natural gas futures

Natural gas July futures rose 4.2% on June 15, 2017, and settled at $3.1 per million British thermal units, above the psychological level of $3. The gain helped natural gas active futures close in the green in the trailing week between June 8 and June 15, 2017, gaining 0.9%.

On June 15, 2017, the EIA reported natural gas inventory data for the week ended June 9, 2017. On a week-over-week basis, natural gas inventories rose 78 Bcf (billion cubic feet), below analysts’ expectation of an 88 Bcf rise. The rise contributed to the upside in natural gas futures on June 15, 2017.

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